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Flash: Congress Fixes the CMBS Risk Retention Problem (Just Kidding)

Last week, the House Committee on Financial Services reported out the Preserving Access to CRE Capital Act of 2016 (the “bill”) in a remarkably bipartisan sort of way (paving the way for: “Well, yes, I did vote for it, but then I voted against it.”). The bill, which was drafted and backed by CREFC, would exempt certain single asset/single borrower securitizations from the risk retention requirements, would allow the B-piece buyer to acquire the risk retention piece in a senior/subordinate capital structure and loosen the criteria for a qualified commercial real estate loan to make it more useful for CMBS players endeavoring to meet the risk retention requirements of Dodd-Frank. See Dechert’s OnPoint for a more detailed description of the bill.

I wish this made me feel better than it does. I have a hard time seeing this bill getting through the Senate and getting our current President’s signature. Maybe, if it’s attached to some must-pass piece of legislation, but even that seems unlikely. There are enough Representatives and Senators willing to mount the barricades to protect every single word of their precious Dodd-Frank Act. That view is certainly shared by the White House. If the bill were to actually pass, in some amiable and delightful alternate universe, it would not pass until very late in the year, far too late for our industry. Worse, the bill is little more than a directive to the regulators to regulate.

Look at just one instance of this. The bill says that some interest-only loans should count as qualified commercial real estate loans for which no risk retention is needed and tells the regulators to develop implementing rules. Which loans? What terms? I don’t know, ask the regulators. Our regulators? How do you really think that’s going to turn out? Moreover, the six agencies responsible for risk retention are notoriously at odds and even when not at odds, the mechanics of multi-agency rulemaking are a clunky Rube Goldberg bureaucratic bowl of spaghetti at best. You have to think that, if sometime in Q4 this bill were actually to pass, it might be months before even an exposure draft of enabling regulations could be promulgated. In the meantime, it would be hard to harvest the potential benefits of this bill.

And of course, the bill is not a panacea; it does not inoculate us against all the concerns that have tumbled around the risk retention rule this past year. While it clearly makes it easier for B-piece money to be raised for horizontal risk retention, it really doesn’t fix all of the vulnerabilities of a sponsor trusting its risk retention compliance to a B-piece buyer counterparty. Just for starters, the sponsors will still go to the chopping block if the B-piece buyer were to intentionally, or even unintentionally, violate the hold, hedge or finance restrictions on the horizontal risk retention piece.

On the other side of the ledger, the bill may have unintentionally done damage to the argument that the current rule already permits a senior/subordinate equity structure in the B-piece. Because this is an industry-sponsored bill, it will be increasingly hard to make the argument that a B-piece buyer can have preferred equity, can have multiple classes of equity, can actively trade the equity and the like, because if not, why did they propose this bill? Not that I actually think that any sponsor was going to run with a B-piece buyer senior/subordinate structure in the absence of any regulatory guidance, but if anyone was thinking about it, they might just stop now.

But, net-net, it still makes me feel better to see the bill reported out of committee. It suggests to me that some of our elected representatives are now more aware that the blunt instrument that is Dodd-Frank will significantly hurt capital formation and that the industry’s arguments about unintended consequences are not just bankers talking their book, but instead raise significant and serious policy issues to which the government needs to attend. So maybe the bill is not awful, but it’s not going to fix our problem.

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